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March 2012 Page 2
Property of Kareem El-Hini
Table of Contents
Chapter: Title ………………………………………………………………………………………………. Page
Section 1: Country Overview ........................................................................... 4
1.1 Political System ................................................................................................................................... 4 1.2 Legal System ....................................................................................................................................... 4 1.3 Economic Overview ............................................................................................................................. 5 1.4 Fiscal and Monetary Policy ................................................................................................................. 6 1.5 Credit Rating ....................................................................................................................................... 6 1.6 Labor Relations ................................................................................................................................... 6 1.7 Competition Policy ............................................................................................................................... 7 1.8 Economic Outlook ............................................................................................................................... 7
Section 2: Energy Sector Overview .................................................................. 9
2.1 Energy Sector Perspective: Historical and Futuristic Perspective ....................................................... 9 2.2 Resources Currently Mobilized for Energy Consumption in Kenya ................................................... 10 2.3 Energy Balance ................................................................................................................................. 12 2.4 Energy Prices .................................................................................................................................... 12
Section 3: Power Sector Overview ................................................................ 14
3. 1 Background of the Sector .................................................................................................................. 14 3.2 Institutional Aspects In the Power Sector .......................................................................................... 14 3.3 Description of the Power System ...................................................................................................... 15 3.4 Electricity demand ............................................................................................................................. 17 3. 5 Electricity Imports .............................................................................................................................. 19 3.6 Selling price of electricity ................................................................................................................... 19 3.7 Energy resources available for future power supply ......................................................................... 22 3.8 Ministry of Energy Least Cost Power Development Plan .................................................................. 25 3.9 Screening Candidate Generation Projects ........................................................................................ 26 3.10 Terms of PPA .................................................................................................................................... 28
Section 4: Types of Companies ...................................................................... 30
4.1 Company limited by shares (resident) ............................................................................................... 30 4.2 Companies limited by guarantee (resident) ....................................................................................... 30 4.3 Companies with unlimited liability (resident) ..................................................................................... 31 4.4 Representative offices of foreign companies (non-resident) ............................................................. 31
Section 5: Tax Regime ................................................................................... 32
5.1 Corporate Income Tax ...................................................................................................................... 32 5.2 Dividend Tax .................................................................................................................................... 32 5.3 Compensating Tax ........................................................................................................................... 32 5.4 Value Added Tax .............................................................................................................................. 32 5.5 Withholding Taxes ............................................................................................................................. 33 5.6 Stamp Duty ........................................................................................................................................ 34 5.7 Losses Carried Forward .................................................................................................................... 34 5.8 Double Taxation ................................................................................................................................ 34 5.9 Personal Income and Benefits Tax ................................................................................................... 34 5.10 Other Tax Issues ............................................................................................................................... 35 5.11 Conclusion on Taxes ......................................................................................................................... 35
Section 6: Customs/Duties ............................................................................ 36
6.1 Customs Rates Relevant to LNG Project .......................................................................................... 36
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6.2 Import Declaration Form (IDF) fee .................................................................................................... 36 6.3 Custom Bonded Warehousing .......................................................................................................... 37 6.4 Overview on EAC and COMESA ...................................................................................................... 37
Section 7: Investment Incentives and other Issues ........................................ 38
7.1 Investment Allowance ....................................................................................................................... 38 7.2 Extension for carrying losses forward ............................................................................................... 38 7.3 VAT Exemption ................................................................................................................................. 38 7.4 Customs Duty Exemption .................................................................................................................. 39 7.5 Other Issues: Investment Protection ................................................................................................. 39 7.6 Other Issues: Foreign Company Concerns ....................................................................................... 39
Section 8: Project Finance ............................................................................. 40
8.1 Background on Power Project Financing .......................................................................................... 40 8.2 Government of Kenya and KPLC role ............................................................................................... 40 8.3 Project Financing Terms ................................................................................................................... 41
Appendix A - Kenyan Shilling vs. US Dollar (2 and 5 year movement) ............ 42
Appendix B - Selected Petroleum Products Consumption Trends .................. 43
Appendix C - Structure of the Downstream Petroleum Industry .................... 44
Appendix D - Price Formula for Wholesale and Retail Pump Prices ............... 48
Appendix E - Detailed Breakdown of Existing Sources of Energy ................... 50
Appendix F - Least Cost Power Expansion Plan: Installed Capacity by Source 51
Appendix G - Least Cost Power Expansion Plan Details ................................. 52
Appendix H - Committed Generation Projects (as of February 2011) ............ 56
Appendix I – Committed and Planned Transmission Projects ........................ 58
Appendix J - World Bank Survey: Tax Issues .................................................. 59
Appendix K - Financing of the Rabai Power Station by BWSC ........................ 60
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Section 1: Country Overview
The Republic of Kenya, whose capital is Nairobi, is a country in East Africa that rests on the equator. It
lies along the Indian Ocean and borders Tanzania, Uganda, South Sudan, Ethiopia and Somalia. The
president is Mwai Kibai and the official languages are English and Swahili. Kenya has a population of 42
million with at least 60% living in rural areas. Most Kenyans receive an education and 85% of the
population is literate. The GDP in 2011 was approximately US$bn 34.6 (per capita: US$ 880) which is a
4.1% boost in real growth from 2010. The portion of the population living below the poverty line is
around 50%.
1.1 Political System
Powers of government are traditionally divided into three main branches: the Executive, the
Legislature and the Judiciary. The Executive consists of the president, who is the head of state and
chief of government, and also cabinet members. The Legislature consists of 224 members who are
elected to a five year term. They are tasked with making laws which are carried out by members of the
Executive. The judiciary is independent and is headed by the High Court and Court of Appeal. The Chief
Justice and the Judges of the High Court and Court of Appeals are appointed by the President. There
are over 40 registered parties although two coalitions, the Party of National Unity (PNU) and the
Orange Democratic Movement (ODM), dominate the political scene
The current president Mwai Kibai, head of the Party of National Unity, will stand down in 2012 and
there will be a power struggle for the countries leadership. Elections will take place during 2012 for
president, parliament, and most other government positions. Tension in the political sphere is
currently high, since two notable candidates, Uhuru Kenyatta and William Ruto, have been called to
stand trial at the International Criminal Court for crimes against humanity.
1.2 Legal System
The Kenyan legal system contains a mix of Kenya statutory (written) law and Kenyan and English
common law mixed with elements of tribal and Islamic law. Although a new constitution was approved
in 2010, implementing changes in the legal system has been hampered by resistance from the police
and judiciary. The judicial system is considered weak and mired in incompetence, executive
interference and corruption. The Corruption Perception Index points to significant corruption in Kenya,
as it is rated 2.1 out of 10 (1 being high) and the constitution calls for a new anti corruption agency.
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Section 2: Energy Sector Overview
2.1 Energy Sector Perspective: Historical and Futuristic Perspective
The energy sector is considered a key enabler to achieving Kenya’s Vision 2030. The energy policy in
Kenya evolves through sessional papers, regulations and Acts of Parliament. The Sessional paper
established the Department of Price and Monopoly Control (DPMC) to monitor trade and enforce
pricing in various sectors, including the petroleum sub-sector. In 1981, the National Oil Corporation of
Kenya Limited (NOCK) was established by the government with the aim to coordinate oil exploration
(upstream) activities. In 1988, the company was mandated to supply 30% of the country's crude oil
requirements to be sold to oil marketing companies for refining and sale to consumers.
The Petroleum Act and the Petroleum Exploration and Production Act are used to guide operations in
the sector. In 1994, there was further implementation of policies to liberalize most sectors including
petroleum products.
In 2004, the Ministry of Energy (MoE) outlined a number of broad objectives including ensuring
adequate, quality, cost effective and affordable energy supply to meet development needs, while
protecting and conserving the environment by more efficient use of natural resources. A Wider use of
renewable energy technologies in the energy supply mix is being encouraged.
The natural resources available for exploitation are Small Hydro, Geothermal, Coal, Biomass, Biogas,
Cogeneration, Tidal Waves, Solar and Wind. However, in order to meet energy demand the country
depends on imports such as petroleum and electricity from Uganda and Tanzania. Consequently the
Government of Kenya (GoK) has embarked on the following broad objectives in the medium term to
mitigate the current situation:
a) Diversification of the country’s energy sources in order to lessen dependence on
unsustainable sources like hydro power;
b) Development, rehabilitation and expansion of generating power plants;
c) Regional interconnections;
d) Expansion and extension of the national grid;
In tandem with other sector reforms, the GoK has undertaken structural reforms in the commercial
segments of the energy sector with a view to improving operational efficiency and induce competition
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to attract investment. As Kenya aspires to be a middle economy, it faces a major task of meeting
energy needs to power its growth.
2.2 Resources Currently Mobilized for Energy Consumption in Kenya
a) Domestic Resources:
Wood fuel and charcoal (biomass) supply close to 76% of total energy consumption in Kenya. Of the
balance, 21% is supplied by imported petroleum products and 3% is supplied by electricity. Wood fuel
is used in rural areas by almost 80% of the population mainly for cooking and heating. Charcoal and
wood fuels are also widely used in urban areas as electricity use is considered expensive for cooking
and heating.
Domestic energy consumption patterns in Kenya portray more of fuel stacking than fuel switching,
where households use multiple fuels to meet different energy demands. Fuel switching is when a
household completely shifts and uses a new fuel. National energy supply is summarized below:
Table 3: National Energy Supply
Energy source Millions of GJ Share of Energy Use
Wood fuel 250 36%
Charcoal 280 40%
Petroleum 150 21%
Electricity 20 3%
TOTAL 700 100%
Source: Least Cost Power Development Plan (LCPDP), 2011
b) Imported Resources
i. Petroleum
In 1994, the GoK deregulated the operations of the downstream market including liberalizing the
distribution and partial liberalization of product supply. Since then, a number of operators have
emerged who import, export, distribute and wholesale petroleum products.
Petroleum accounts for 21% of the country's primary energy. The demand for petroleum has been
growing steadily at above 10% per annum since 2004. Appendix B contains trends for selected
petroleum products.
Despite sinking over 32 exploratory oils since independence, Kenya has yet to strike any oil or gas.
Exploration interest in Kenya increased after oil and gas deposits were found in neighbors like Uganda,
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3.4 Electricity demand
The demand for electricity has shown an upward trend in the last 6 years. Demand was 4,200 GWh in
2004/05 and increased to 5,318 GWh in the year 2009/10. In Kenya electricity is supplied to less than
15% of the total population, predominantly middle and upper income groups.
Table 10: KPLC Sales by Customer Category (GWh)
TARIF
F
COVERED BY THIS TARIFF 03/04 04/05 05/06 06/07 07/08 08/09 09/10
00 DC Domestic 900 956 1,028 1,113 1,255 1,254 1290
SC Small Commercial 476 522 522 558 590 823 823
B Mdm Commercial/Industrial 819 885 901 985 996 n/a n/a
C Lrg Commercial/Industrial 1,683 1,776 1,877 2,054 2,108 n/a n/a
CI Commercial and Industrial n/a n/a n/a n/a n/a 3,020 3,153
IT Off-peak 55 53 54 50 74 43 n/a
SL Street lighting 7 8 9 11 13 15 16
TOTAL 3,940 4,200 4,391 4,771 5,036 5,155 5318
% INCREASE P.A. 7.8% 6.6% 4.5% 8.7% 5.6% 2.4% 3.5%
Source: LCPDP, 2011
Historical Peak Demand in MW
Source: LCPDP, 2011
899
920
987
1044
1072
1107
800
900
1000
1100
1200
1300
2005 2006 2007 2008 2009 2010
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a) Regional Comparisons
Total electrical consumption in the East African Power Pool (EAPP) region is 128,000 GWh while GDP
for the region is US$ 143,000. Per capita consumption in Kenya is approximately less than half the
regional average. Kenya’s GDP per Capita is approximately 16 % higher than the regional average.
Table 11 : Regional Comparisons in Consumption
Country/Region
Population
(Millions)
Total Electrical
Consumption
(GWh)
Per Capita
Consumption
(KWh)
GDP
(US$bn)
GDP Per
Capita
(US$)
EAPP 385.56 128,001 332 182.16 472
Egypt 75.68 104,092 1,375 113.48 1,500
DRC 64.39 5,997 93 0.74 12
Kenya 36.91 5,476 148 20.21 547
Sudan 39.38 3,438 87 13.25 337
Tanzania 39.38 3,182 81 11.75 298
Ethiopia 79.94 3,130 39 10.95 137
Uganda 30.26 2,068 68 8.11 268
Djibouti 0.69 260 375 0.54 777
Rwanda 10.14 232 23 2.46 242
Burundi 8.78 126 14 0.66 76
Source: Kenya Power Report Q3 2010 Published by Business Monitor International, June 2010
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3.7 Energy resources available for future power supply
a) Hydro potential
Kenya has considerable hydropower potential estimated in the range of 3000-6000 MW. At least half
of the overall potential originates from smaller rivers that are key for small-hydro resource generated
electricity. This hydropower potential is located in five geographical regions, representing Kenya’s
major drainage basins.
Challenges for further development:
The economic risk in hydropower projects is large, because they are capital intensive. A hydropower-
dominated power system like Kenya’s is vulnerable to large variations in rainfall and climate change. In
the recent past the failure of long rains has resulted in power and energy shortfalls.
b) Geothermal resources
Geothermal activities in Kenya are concentrated in the East African Rift which has been associated with
intense volcanism and faulting resulting in development of geothermal systems.
The Government through the Ministry of Energy, GDC, KenGen and other partners has undertaken
detailed surface studies of some of the most promising geothermal prospects in the country. These
prospects are clustered into three regions namely the Central Rift (1,800MW), South Rift (2,450MW)
and North Rift (3,450MW). Geothermal is currently the most promising indigenous resource for
development of power. However, due to the high risk of geothermal drilling securing the necessary
private sector financing has proven an obstacle to the development of geothermal resources.
c) Biomass
Biomass includes wood fuel and agricultural residues. Wood fuel is the highest supplier of household
energy consumption in rural Kenya. At the national level, wood fuel and other biomass account for
about 68% of the total primary energy consumption.
d) Cogeneration
Cogeneration using bagasse as a primary fuel is common practice in the domestic sugar industry in
Kenya. Biogas potential in Kenya has been identified in Municipal waste, sisal and coffee production.
The total installed electric capacity potential of all sources ranges from 29-131MW.
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e) Solar Energy Resources
Kenya has great potential for the use of solar energy throughout the year because of its strategic
location near the equator.
Over the last three years, the number of home systems installed has grown at an average of 20,000
units per annum. With the enhanced state support, it is estimated that the rate of market penetration
for home units will improve considerably.
f) Wind resources
There is little experience in using wind for power generation in Kenya, however, awareness and
interest is steadily growing. The most recent investment in wind energy in Kenya is KenGen’s 5.1MW
farm in Ngong. A further 610MW are to be developed by IPP’s including the 300MW by Lake Turkana
Wind. Local production and marketing of small wind generators has started and pilot projects are
under consideration. Still, only very few small and isolated wind generators are in operation so far.
g) Fossil fuels - Local coal reserves
The Government is currently undertaking coal exploration activities in Mui basin. The Ministry of
Energy has so far drilled 40 appraisal wells in the basin intercepting coal seams of up to 16 meters in 27
of the wells. The GoK recently selected China's Fenxi Mining Group to develop coal mines in its Eastern
Province, where production is expected to kick off in the next three years. Further coal resource
exploration work has also commenced in other prospective sites such as Taru basin in Kwale District.
Local coal is expected to feed the governments new 600 MW coal-fired plant at Mombassa, which is
back on track after recently securing a suitable plot of land.
h) Fossil fuels - Imported coal
Kenya imports an average of 3.6 million tonnes of coal annually for use mainly in manufacturing
industries. Coal can also be used as a substitute for more expensive oil in generation of electric power.
The Ministry will explore coal resources for exploitation including for power generation and industrial
use.
i) Petroleum products imports
Currently about 35% of the country’s electricity installed capacity is petro thermal based which
requires a lot of imported petroleum products. Petroleum products used in power generation in Kenya
are Heavy Fuel Oil, Industrial Diesel, and Kerosene.
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j) Power Imports and Exports
This will be made possible by way of Regional Interconnections. The regional interconnections are
progressively evolving with the expected planned transmissions lines linking regional countries likely to
be implemented under the Eastern Africa Power Pool (EAPP) the Nile Basin Initiative and the Nile
Equatorial Lakes Subsidiary Action Programme. These lines include Kenya- Isinya-Tanzania (Arusha)
400kV line, second Kenya (Lessos)-Uganda (Jinja) 220kV line, Kenya-Ethiopia 500kV DC line and a 132kV
cross-border electrification line to Moyale town from Ethiopia.
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3.8 Ministry of Energy Least Cost Power Development Plan
Kenya’s power industry generation and transmission system planning is undertaken on the basis of a
20 year rolling Least Cost Power Development Plan (LCPDP) updated every year. The purpose is to
forecast future power needs and determine the most cost effective way to expand the system by
considering the availability and cost of available local and imported resources. Appendix F displays the
installed capacity of each source each year up to 2030 according to the plan, while appendix G provides
complete details of the expansion plan.
a) Peak Load Forecasts
The MoE forecasts the energy capacity and consumption for the period 2010-2030 for three scenarios
based on the following growth rates:
Scenario / Year 2010 - 2020 2020 - 2031 2010 - 2031
High growth scenario 16.50% 14.10% 15.30%
Medium growth scenario 14.50% 12.20% 13.40%Low growth scenario 13.40% 10.50% 11.90%
Table 15: Average Yearly Growth Rates of Power Needs
Source: LCPDP, 2011
The MoE has forecasted the following peak load capacity and consumption forecasts for three cases:
Table 16: Peak Load Capacity Forecast
YEAR GWh MW Load factor GWh MW Load factor GWh MW Load factor
2010 6,683 1,120 68.1% 6,683 1,120 68.1% 6,683 1,120 68%
2015 10,040 1,729 66.3% 10,597 1,830 66.1% 11,554 2,001 66%
2020 15,887 2,768 65.5% 18,156 3,163 65.5% 21,744 3,791 65%
2025 25,795 4,528 65.0% 31,620 5,512 65.5% 39,762 6,890 65.9%
2030 41,409 7,254 65.2% 54,761 9,458 66.1% 72,837 12,423 67%
LOW SCENARIO REFERENCE SCENARIO HIGH SCENARIO
Source: LCPDP, 2011
b) Implementation of the plan
The MoE shall ensure successful and timely implementation of the following projects through the
project implementation committee. Details of the committed and proposed projects are included in
Appendix H.
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Table 17: Commited and Proposed Generation and Transmission Projects
Project description Capacity MW /
length of KM
Time lines Implementing
agencies
Approximated
present value
costs
Committed generation projects 1,815 MW 2011-2015 KENGEN and IPP US$ 3.9 billion
Proposed generation projects 18,920 MW 2015-2031 KENGEN and IPP US$41.4 billion
Proposed transmission projects 10,345Km 2011-2031 KETRACO US$4.48 billion
3.9 Screening Candidate Generation Projects
As part of the LCPDP, screening curves were constructed for all candidate units to provide an
illustration of annualized costs of electricity generation for different sources of generation. The
technique is an approximate method that captures major tradeoffs between capital costs, operating
costs and utilization levels for various types of generation. The screening curve method expresses the
total annualized electricity production cost for a generating unit. This approach is useful for quick
comparative analyses of relative costs of different electricity generation technologies. Annualized costs
are based on the following assumptions:
Crude Oil Price = 90 US$/bbl
Coal Price = 100 US$/tone
Natural Gas = 9.11 US$/GJ
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Table 18: Annualized Cost of Generation by Source
Geothermal Coal GT-
Kerosene OCGT**-
NG MSD*** Import Wind Hydro
Capacity* 140 MW 300
MW 180 180 160 1000 300 140
Fixed Cost
579.7
715.8
144.8
144.8
232.5
484.8
740.0 613.0
Capital (USD millions) 511 631 135 135 218 455 690 507
Capital ($/kW) 3650 2104 750 750 1364 455 2300 3621
IDC Factor
1.124
1.134
1.073
1.073
1.065
1.065
1.073 1.209
Annuity Factor
0.094
0.094
0.102
0.102
0.102
0.094
0.094 0.082
Interim Replacement 0.92% 0.92% 0.35% 0.35% 0.35% 0.35% 0.64% 0.87%
Fixed Annual Capital ($/kW/yr)
426.00
245.50
84.70
84.70
153.10
47.10
246.90 396.1
Fixed O & M ($/kW/yr)
56.0
69.0
11.8
11.8
62.5
30.0
28.1 19.8
Total Fixed Annual Cost ($/kW/yr)
482.0
314.0
97.0
97.0
216.0
15.0
275.0 416
Total Outage Rate
0.068
0.267
0.078
0.078
0.098
0.150
0.133 0.0969
Outage Adjustment
1.073
1.364
1.085
1.085
1.108
1.176
1.153 1.107
Annual Fixed Cost ($/kW.yr)
517
429
105
105
239
91
317 461
Annual Fixed Cost ($/kWh) 0.0590 0.0490 0.0120 0.0120 0.0273 0.0104 0.0362 0.0526
Variable Cost
Fuel Price ($/GJ)
-
4.557
19.370
9.110
11.080
-
-
-
Heat Rate (kJ/kWh)
-
9,914
11,440
9,504
9,336
-
-
-
Fuel Cost ($/kWh)
-
0.045
0.222
0.087
0.104
-
-
-
CO2 tax ($/kWh)
-
0.011
0.009
0.004
0.007
-
-
-
Variable O & M ($/kWh)
0.0056
0.0043
0.0120
0.0010
0.0090
0.0500
0.0010
0.0053
Total Variable ($/kWh)
0.0056
0.0603
0.2425
0.0916
0.1194
0.0500
0.0010
0.0053
Total Variable ($/kW.yr)
49
528
2,124
802
1,046
438
9
47
Total Cost ($/kWh)
0.0646
0.1093
0.2545
0.1036
0.1467
0.0604
0.0372
0.0579
Total Cost ($/kW.yr)
49
528
2,124
802
1,046
438
9
47
* Most likely configuration of plant ** Open Cycle Gas Turbine ***Medium Speed Diesel Source: LCPDP, 2011
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the good or service. There are nine schedules of VAT which define the tax rate, specify which goods
and services are exempt or zero-rated, and provide other relevant information. The most pertinent
schedules are one, two, five and eight.
The first schedule states that the general tax rate is 16%.
The second schedule contains a list of goods exempted from tax. The relevant goods are: petroleum
oils and crude, regular and premium motor spirit (gasoline), other light oils and preparations, partly
refined (including topped crudes), other medium petroleum oils and preparations, gas oil (automotive,
light, amber, for high speed engines), and natural gas in gaseous state.
Schedule five contains zero-rated goods (effectively 0% tax). It includes: kerosene type jet fuel,
illuminating kerosene, liquefied natural gas, propane and other liquefied petroleum gases.
Schedule eight contains special goods which are zero rated and includes: capital equipment for
privately financed electric power generation projects with capacity to sell electricity into the national
grid, subject to a written approval by the Permanent Secretary to the Treasury. (Excluding motor
vehicles, spare parts and office equipment)
5.5 Withholding Taxes
Table 19: Witholding Tax Rates Resident Non-Resident
Management fees 5% 20%
Professional fees 5% 20%
Royalties 5% 20%
Equipment Leasing 3% 5%
Interest (bank) 0% 15%
Rents - buildings (immovable) N/A 30%
Rents - other (except aircraft) 3% 15%
Pensions/provident schemes 10-30% 5%
Consultancy and agency 5% 20%
Contractual 3% 20%
Source: Price Water House Cooper East Africa Tax Guide, 2011
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5.6 Stamp Duty
Stamp duty is paid on the following transactions:
Table 20: Stamp Duty Rates Tax Rate
Increase of share capital 1%
Transfer of stock or market securities 1%
Transfer of immovable property 4%
Lease (1-2 years) 1% of annual rent
Lease (any other period) 2% of annual rent
Source: Deloitte Tax Matters, 2008
5.7 Losses Carried Forward
Losses may be carried forward for five years including the year they were incurred. Losses may not be
carried back and capital losses are not deductible.
5.8 Double Taxation
Kenya has double taxation treaties with UK, India, Germany, Zambia, Norway, Sweden, Denmark and
Canada. Treaties are not in place, however, with Egypt or Japan.
5.9 Personal Income and Benefits Tax
Personal income is taxed based on an individual’s annual salary:
Tax Bracket (In USD; 82.7 KES/USD) Tax Rate
0-1,411 10%
1,411-2,822 15%
2,822-4,233 20%
4,233-5,643 25%
5,643+ 30%
Table 21: Personal Income Tax Rates
Source: Price Water House Cooper East Africa Tax Guide, 2011
Most benefits (staff meals, electricity, servants, water, security, etc.) are taxable at the higher of the
cost to the employer of providing the benefit or the fair market value.
Housing provided for an employee is typically taxed at a 15% tax rate while vehicles provided for
private use are taxed at a progressive rate which increases with the size of the engine.
Fringe Benefit Tax (FBT) is payable on interest free or low interest loans granted to employees.
Whether exempted or not, the employer must pay the tax at the resident corporate tax rate of 30%.
The benefit is the difference between actual interest charged and the interest defined by the
Commissioner’s prescribed rate published quarterly.
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An employer must contribute a maximum per employee of KES 2,400 and KES 3,840 to the national
social security fund and hospital insurance funds respectively. The rate is 5% and 1% of payroll
respectively.
5.10 Other Tax Issues
Thin Capitalization: Deductibility of interest expenses is only proportionally restricted for
foreign controlled companies (control defined as participation of at least 25%) when the ratio
of all interest bearing liabilities is three times greater than the companies paid up capital plus
retained earnings/accumulated losses (i.e: Debt : Equity > 3:1).
There is no capital gains tax on disposal of immovable property.
There are no real property taxes or capital duty taxes (for individuals).
5.11 Conclusion on Taxes
As a concluding note, Kenyan tax law is very complicated and often ambiguous. The law has changed
often and is likely to keep evolving, possibly as early as this year. In a survey conducted by the World
Bank, foreign companies ranked tax rates as the number one constraint on doing business (results in
Appendix I). Moreover, the time firms spent in meetings with tax officials averaged 6.7 days per annum
in Kenya compared to 2.7 days per annum on average in Sub-Saharan Africa. Justifiably, Kenya ranks
166 out of 183 in Paying Taxes. Foreign entities who have failed to understand the significance of tax
law on profitability have paid a heavy price.
Therefore, before submitting a financial proposal to the GOK, it is highly recommended to seek
professional tax and legal advice. Local tax specialists can assist in designing a capital structure which
mitigates the issue of thin capitalization while also appealing to the project owners. Specialists can also
appraise the project assets, cash flows, etc. and recommend tax incentives to target during
negotiations, as well as lobbying the GOK on the client’s behalf.
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Section 8: Project Finance
8.1 Background on Power Project Financing
There are currently 43 licensed commercial banks in Kenya including a number of international banks.
These international players have previously teamed up with Development Financial Institutions (DFI)
such as the World Bank and IFC to finance mega infrastructure projects. For example, African Financial
Development Bank (AFDB) was the lead arranger for the USD 773 million, Lake Turvana Wind Farm
along with Stanbic Bank, NedBank (both locally listed International Banks) and other co-arrangers.
Locally owned banks do not have sufficient funding availability for this project.
Private Banks have a greater appetite for financing IPP’s when development funds are involved.
Although Sub-Saharan Africa projects with DFI funding tend to take longer to reach financial close than
privately funded projects, project sponsors argue that having multilateral development institutions
helped them maintain contracts with governments and resist pressure to reduce tariffs. For example,
the IFC arranged all the debt for Tsavo, owner of Kipevu II in Kenya, and took a 5% equity stake. Tsavo
has since resisted KPLC pressure to reduce its tariffs. Conversely, OrPower4, also in Kenya, had no
multilateral involvement in its debt or equity and reduced its tariff for the second phase of the plant.
For a case study outlining the financing of Rabai Power Station, see Appendix K.
8.2 Government of Kenya and KPLC role
The GoK has not provided sovereign guarantees to IPP’s so a series of alternate arrangements are
made. Key documents provided are the Letter of Safety provided by the GoK and the security package
provided by KPLC. The Letter of Comfort addresses force majeure and political issues, but is not a
sovereign guarantee due to its limited coverage. The security package comprises: an escrow account
that KPLC must provide one month’s payment for duration roughly equivalent to period of primary
debt repayment; and a stand-by Letter of Credit, which covers three months billing. Initially 100% cash
cover was required for the Letter of Credit; however, this has since been eased to 20%.
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8.3 Project Financing Terms
International Banks can offer tenors up to 10 or 12 years depending on bankability. Syndications which
involve multiple tranches are common in large loans. Private Banks typically lend up to 70% of the
projects value but this figure can reach 75% when DFI’s are involved.
Banks typically lend at LIBOR + six percent, LIBOR + five percent with DFI’s. Commitment fees and
upfront fees vary from 50 basis points to 150 basis points.
While the bulk of funding will be from offshore banks, funding from “on the ground” banks is useful
since they will lobby the GoK to guarantee the bankability of the project which is useful to the project
developers also.
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Appendix K - Financing of the Rabai Power Station by BWSC
(Source: Industrialization Fund for Developing Countries)
The following is a classic example of project financing based on a financial structure where financing is
provided through project debt and equity. This case provides an example of project financing in
difficult times where access to credit is scarce; it is completely financed by the project sponsors and a
number of leading Development Financial Institutions (DFI’s). Burmeister & Wain Scandinavian
Contractor (BWSC) is a Danish turnkey contractor and operator of medium and large diesel engine
based power systems. One of BWSC’s projects was a 90 MW plant, which lies outside Mombasa, and is
able to provide electricity to more than 400,000 households. BWSC and Aldwych International are the
lead sponsors of the project, and are responsible for the construction, operation and maintenance of
the plant.
The financing of the project is based on a typical purchase power agreement structure to reduce the
risk. This project is based on a 20-year PPA entered with the national transmission and distribution
company, Kenya Power & Lighting Company, providing solid financial security for future income. The
complete contractual structure of the project is presented below:
BWSC Spare Parts Supply Agreement (10 yrs)
BWSC EPC Off-Shore Supply Contract EPC On-Shore Contract
Rabai Operation & Maintenance Ltd. (Kenyan Co. - BWSC 51%, Aldwych 49%) O&M Agreement (20 yrs)
Kenya Power & Lightning Co. Site Lease Power Purchase Agreement Letter of Credit
Government of Kenya Letter of Comfort
Fuel Supplier Fuel Supply Agreement
Aldwych Construction Mgmt. Kenya Ltd. (Aldwych 100%) Construction Management Agreement
Rabai Power Ltd. Kenya
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26.7
79.0
5.6
Type of Financing (in million EUR)
Equity (24%)
Senior Debt(71%)
Mezz. Debt(5%)
BWSC was able to put together a financing agreement
with Europe’s leading DFI’s to finance the 111.3 EUR
million project. 24% of the financing of the plant is equity,
contributed from Aldwych, BWSC, Danish Industrialization
Fund for Developing Countries (IFU) and FMO.
The remaining 76% is debt financed by several DFI’s.
The project sponsors, Aldwych and BWSC, contributed
60% of the total equity (including 11% bridge equity)
equaling around 14% of the total project cost.
The remaining financiers are:
- IFU - the Danish development finance institution
- FMO - the Dutch development finance institution
- DEG - the German development finance institution
- PROPARCO - the French development finance institution
- EFP - European Financing Partners, a investment company owned by the European Investment
Bank and 12 European DFI’s (incl. all of the abovementioned)
- EAIF - Emerging Africa Infrastructure Fund, whose founding members are governments of
several European countries
The financial structure of the project is presented below. Blue squares indicate the equity holders,
green mezzanine debt and red senior debt.
EAIF
€ 2,800,000
Proparco € 2,800,000
DEG € 12,000,000
FMO € 19,800,000
EAIF € 19,800,000
Proparco € 19,800,000
EFP € 7,800,000
Aldwych € 7,740,000
BWSC € 5,340,000
IFU € 5,340,000
FMO € 5,340,000
Bridge Equity: Aldwych € 1,470,000
BWSC € 1,470,000
Rabai Holding Ltd UK
Rabai Power Ltd
Kenya
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List of References
Documents
Updated Least Cost Power Development Plan Study Period: 2011 – 2031, March 2011
The Ministry of Energy 2nd National Energy Conference Report, October 2011
World Bank Ease of Doing Business Report: Kenya, 2012
Economist Intelligence Unit Country Commerce Report: Kenya, March 2011
Business Monitor Online Business Forecast Report: Kenya, 2011/2012
Business Monitor Online Power Sector Report: Kenya, 2010/2011
Kenya Institute for Public Policy Research and Analysis: A COMPREHENSIVE STUDY AND ANALYSIS ON
ENERGY CONSUMPTION PATTERNS IN KENYA, July 2010
The Income Tax Act: Kenya (Commenced in January 1974)
The Value Added Tax Act: Kenya (Commenced in January 1990)
The Companies Act: Kenya (Commenced in January 1962, Revised 2009)
Consultancy Service for Liquefied Natural Gas Study, Mott McDonald, December 2009
Components of the Kenya Petroleum Sector, Ministry of Energy, 2009
Websites
Deloitte Kenya Tax Guide: http://www.deloitte.com/assets/Dcom-
SouthAfrica/Local%20Assets/Documents/IntoAfrica/Kenya.pdf
Deloitte Economic Outlook, Kenya: http://www.deloitte.com/assets/Dcom-
Kenya/Local%20Assets/Documents/EconomicOutlook2011.pdf
PKF International Limited Tax Guide, Kenya: http://www.claytonmckervey.com/attach/worldwide-tax-
guide-kenya.pdf
EAC Common External Tariff: http://www.kra.go.ke/customs/pdf/EAC%20External%20Tariff.pdf
PWC East Africa Tax Guide: http://www.pwc.com/en_UG/ug/pdf/east-african-tax-guide-2011-2012.pdf
Companies in Kenya Guide: http://softkenya.com/law/companies-in-kenya-company-law/
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AN OVERVIEW OF EXISTING REGULATORY ENVIRONMENT AND FRAMEWORK FOR INVESTORS:
http://www.liverpoollawsociety.org.uk/userfiles/file/Society%20News/Existing%20Regulatory%20Envir
onment%20and%20Framework%20for%20Investors.pdf
The Energy Act: http://www.erc.go.ke/ctariff.pdf
Kenya Revenue Authority Customs Services Department:
http://www.kra.go.ke/customs/faqcustoms2.html
Interviews
Onyango, Richard (Infrastructure Finance Manager) and Parker, Kwame (Director & Regional Head
Debt Solutions & Infrastructure Finance). Stanbic Bank. Nairobi, Kenya. 27 February 2012.
Nyambego, Obed.(Senior Tax Advise). PricewaterhouseCoopers Limited. 27 February 2012. Nairobi,
Kenya. 27 February 2012.
Mussa, Amyn (Partner). Anjarwalla & Khanna Law Firm. Nairobi Kenya. 28 February 2012.
Adi Bidu, Guracha (Manager – Investor Services). Kenya Investment Authority. Nairobi, Kenya. 28
February 2012.
Ondengo, Brown (Consultant). Mombassa, Kenya. 29 February 2012.
Sonoiya, David (General Manager) and Bante, Abdub (Project Analyst. Kenya Investment Authority.
Mombassa, Kenya. 30 February 2012.
Odumbe, J.O. (Operations Manager). Kenya Electricity Generating Company Ltd. Mombassa, Kenya. 2
March, 2012